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ACC406 - Chpater 9.docx

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ACC 406
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CHAPTER 9: BUDGETING , RODUCTION , CASH AND M ASTER B UDGET Budgeting, Planning and Control Budgets are financial plans for the future, key component of planning as they identify objectives needed to achieve them. Strategic Plan identifies strategies for future activities and operations, covering five years. Objectives are on the basis of the budget. Budget and strategic plan should be tightly linked. Can translate overall strategy into long and short-term objectives. Advantages of Budgeting 1. Forces managers to plan 2. Provides information that can be used to improve decision making 3. Provides a standard for performance evaluation 4. Improves communication and coordination Control is achieved by comparing actual results with budgeted results on a periodic basis (monthly). Master Budget for a one-year period, fiscal year of the company. Broken down into quarterly and monthly budgets. Smaller time periods allows a manager to compare actual data with budgeted data more often.  Continuous Budget is a moving 12-month budget. Maintain that it forces managers to plan ahead constantly Directing and Coordinating master budget made during last 4 - 5 months of current years  Budget Committee reviews budget, provides policy guidelines and budgetary goals. President of the organization appoints members: Vice president for marketing, vice president for manufacturing and the controller. Controller is the Budget Director. Responsible for directing / coordinating budget process. Major Components of the Master Budget  Operating Budget describes the income-generating activities of a firm (sales, production and finished goods inventories)  Financial Budgets detail inflow and outflow of cash and financial position of company. Appear in the cash budget. Expected financial position shown in Pro Forma balance sheet. Preparing Operating Budget 1 CHAPTER 9: BUDGETING , RODUCTION , CASH AND M ASTER B UDGET 1. Sale Budget describes expected sales in units and dollars. a. Bottom up approach requires individual salespeople to submit sales prediction. Sales = Units x Unit Selling Price 2. Production Budget tells how many units must be produced to meet sales needs and ending inventory requirements Units to be Produced = Expected Sales + Ending Inventory – Beginning Inventory 3. Direct Materials Purchases Budget tells the amount and cost of raw materials to be purchased in each time period. Purchases = Materials Needed + Desired Ending Inventory – Beginning Inventory 4. Direct Labor Budget shows the total direct labor hours and the direct labor cost needed for the number of units in the production budget Labor Cost = Units to be Produced x Time
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